The October employment report was a very mixed bag as I pointed out in my data byte yesterday. The 166,000 rate of job growth reported in the establishment survey is certainly a respectable pace, but there were good reasons for questioning whether it can be accepted at face value. First, the Bureau of Labor Statistics (BLS) is imputing jobs for new firms at the same pace as it did last year. We just got the preliminary benchmark revision which showed that job growth had been overstated last year by almost 300,0000, or 25,000 per month. Unless the economy is growing more rapidly now than it did last year, then we can reasonably assume that this imputation is leading to a comparable overstatement this year. Some of the other peculiarities in the data are an increase of 92,000 jobs in restaurants over the last three months (a 3.5 percent annual rate) even though the Commerce Department reports a decline in real sales from July to September (we don't have October data yet). Also, the number of people employed in real estate is now 25,000 higher (1.4 percent) than its year ago level, even though home sales are down by close to 20 percent. But even if the picture in the establishment survey is still on net positive, the household data surely is not. The most striking item is the drop in the employment rate (EPOP), the percentage of the population that is employed. This fell by 0.2 percentage points in October. While the monthly numbers on the household side are always erratic, this decline is part of a longer trend. The 62.7 percent EPOP is 0.6 percentage points below the December 2006 level, corresponding to a drop in employment of 1.4 million people. One of the peculiarities of this cycle is that labor market weakness has expressed itself far more in declining labor force participation rather than measured unemployment. The difference is that the unemployed tell surveyors that they are looking for jobs, whereas to not be counted in the labor force people say that they are neither employed nor looking for work. It doesn't seem plausible that 1.4 million people have just decided that they no longer feel like having a job, so presumably their decision to drop out reflects labor market weakness. (The explanation is not demographic -- the over 55 crew is working more than ever, the biggest falloff is for people between ages 35-44). Ben Bernanke made exactly this point in a speech at the American Economic Association convention in 2004. In that speech he was justifying the Fed's continuation of its low interest rate policy in spite of a relatively low unemployment rate. Bernanke commented: "It appears that workers who have lost their jobs in the past couple of years have been more likely to withdraw from the labor force (rather than report themselves as unemployed) than were job losers in previous recessions. Indeed, the labor force participation rate fell sharply between 2000 and 2003, from a little over 67 percent to about 66-1/4 percent. Similarly, the ratio of employment to the working-age population, a statistic that reflects both those who become unemployed and those who leave the labor force, has fallen significantly, by 2.8 percentage points between its peak in April 2000 and its trough this past September. The tendency of recent job losers to leave the labor force likely masks some of the effects of job cuts on the unemployment rate, so that the current measured level of unemployment may understate the extent of job loss or the difficulty of finding new work." I was glad to see the vice-chair of the Fed focus on what I had considered to often be a better measure of labor market slack than the unemployment rate. Unfortunately, his comments seem to have been forgotten by those covering the employment data.
--Dean Baker